In the end, E.ON, the unwilling banner wavers for new coal, bowed out of the Kingsnorth controversy with more of a whimper than a bang.

For almost two years, the German- owned energy company has been waiting for the go-ahead to build Britain's first coal plant for decades. At a stroke, E.ON's plan had galvanised the environmental movement into campaigning against new coal plants. The site of the new giant 1600MW plant, adjacent to the existing Kingsnorth plant in Kent, became protestors' bete noire.

Staff working at the plant had adopted a siege mentality. When a Guardian photographer visited the control room last summer, one engineer joked to a colleague after his picture was taken: "You're going on the hitlist now." E.ON vowed to tough out the storm and wait for ministers to decide.

Yesterday, the company quietly announced on its website that it was shelving the plans, blaming a dramatic fall in energy demand which it said made Kingsnorth redundant. It said it would reconsider in two or three years and could go ahead if energy prices recover. In the end, it was the recession, not government dithering or direct action protestors which killed off Kingsnorth. But politicians and the environmentalists played their part.

Kingsnorth was never meant to become a test case for coal power or for whether the government's green agenda – and in particular energy secretary Ed Miliband – would stand up to the big energy companies. Other energy companies had similar plans to build new coal plants to fill the UK's looming energy gap. E.ON was the only one brave – or foolhardy – enough to put its head above the parapet and make a formal application to the government. Early last year, there was no moratorium on building coal plants. But the government's delay in making a planning decision on Kingsnorth suggested a rethink was on the cards and the environmental backlash against coal started to grow.

When Miliband took charge of the climate change department last autumn, he told aides that he wanted to be the "guy who sorted out coal". As revealed in the Guardian earlier this year, he announced that no coal plants could be built unless they buried their carbon emissions using expensive new carbon capture and storage technology (CCS). Because the technology is unproven and needs government subsidy, it in effect amounted to a ban on new coal plants. The environmentalists were jubilant, but not ready to declare victory because Kingsnorth wasn't dead. The government had also begun a competition in late 2007 for companies to build what it claimed would be the world's first demonstration CCS project using coal. E.ON had also entered Kingsnorth into the competition, which could take another two years to complete, as did Scottish Power and Peel Energy, majority owned by Rwe npower.

This meant E.ON could still build the plant if it won the competition, which would only require it to fit about a quarter of the plant – 400MW – with the CCS technology. Peel Energy's project involves building a much smaller coal plant while Scottish Power would retrofit the CCS technology onto its existing plant at Longannet. Campaigners remained opposed to Kingsnorth because it was the largest new coal plant on the table.

When Gordon Brown wrote to give his personal support to a mini trial staged at Longannet earlier this year, industry insiders speculated that it signalled that Scottish Power was the favourite, as it was the only entry which did not involve building a new plant.

Not surprisingly, insiders at E.ON have become frustrated with the government's dithering. Clearly, events have overtaken the glacial pace of progress of the CCS competition and E.ON has decided not to hang around for a result. But Scottish Power and Peel Energy are unlikely to be popping the champagne corks just yet.

The companies complain the government is unwilling to meet the full cost of the demonstration and it's not clear whether – or when – the winning entry will get built. Unless CCS gets the public funding it needs to become a reality, it could be a pyrrhic victory.